By Jennifer Hewett
Jim Chalmers should enjoy the moment. Any relief that the Reserve Bank of Australia is not raising rates this month will prove only a temporary respite from the pressures bearing down on the economy and the government.
“It’s a welcome reprieve for millions of Australians with a mortgage,” the treasurer said. “It doesn’t make life any easier for people, but it doesn’t make life harder either.”
RBA governor Michele Bullock is always cautious in her predictions about how things will play out for the economy.
But the basic message is clear enough. The economy is slowing, compounded by plummeting consumer confidence, a stalled housing market and rising unemployment.
Despite the global boom in data centre construction also under way in Australia, business confidence is weak and has been further destabilised by the prospect of capital gains tax increases masquerading as a federal budget.
Yet the RBA can’t reduce rates to counter this because the prospect of Australia’s inflation staying high is even more of a risk. The apparent end of the Iran war should stop inflation getting much worse by year-end but much of that inflationary pressure is baked in.
“There are signs that some firms experiencing cost pressures are increasing the prices of their goods and services and others are looking to do so,” the board statement noted.
The central bank’s three rate increases since the beginning of the year does mean “financial conditions are now tighter than they were, and there are signs that the economy is slowing as expected”.
“But inflation is still too high and the board judged that it was appropriate to leave the cash rate target unchanged,” it said.
That “wait and see” mode with the cash rate at 4.35 per cent may last indefinitely as the bank tries to ensure inflation is contained by slower growth and higher rates.
“Leaving rates on hold today will allow the board to assess how these previous increases are flowing through the economy,” Bullock said.
According to Stephen Smith from Deloitte Access Economics, the more important question than Tuesday’s decision is, “what comes next?”
“The Reserve Bank is caught between two uncomfortable facts: inflation remains too high, while economic growth is clearly losing momentum,” he said.
Bullock said that an end to the Iran conflict would help ensure inflation doesn’t get “supercharged”.
“We will have to make sure that the inflation problem we had prior to the conflict is addressed and that’s really what the recent tightening has been about,” she added.
As for the budget?
“We’re not there to offer advice and views on individual policy measures by the government in the budget,” Bullock said carefully.
Inflationary speed limits
But as HSBC economist Paul Bloxham noted this week, it would have been “helpful” if policymakers had prioritised policy shifts allowing the economy to grow faster without hitting inflationary speed limits.
“However, our assessment is that the recent budget did not focus on growing the economy as much as it focused on redistribution,” Bloxham said.
This echoes a more general alarm that capital gains tax increases in the budget will be a drag on investment, innovation and growth.
But the Labor government is showing far less interest in growing the whole economic pie than in dividing it into ever smaller pieces to be sold with slogans like “fairness” or “intergenerational equity”.
Labor’s changes to negative gearing and increases in capital gains taxes for housing already seem certain to create plenty of unintended consequences and disruption as house prices are set to keep falling sharply, for example.
Jacob Caine, president of the Real Estate Institute of Australia, is among those pointing out the housing crisis is fundamentally a supply crisis. “Housing affordability will not be solved by reshaping tax settings in a way that reduces rental investment, adds uncertainty, and risks slowing the delivery of new homes,” he said.
Given community sensitivity about Australia’s crisis of affordability, the government thinks it can afford to ignore such concerns, including from property experts, by arguing it will help first home buyers get into the market. Chalmers therefore insists it would have been easier but wrong to keep tax arrangements for housing exactly as they were.
Balancing that equation will still take years and, according to the government’s own estimates, lead to only a modest improvement over the next decade. But it’s at least an arguable proposition with considerable support.
“I think we have to wait for all these things to settle down,” Bullock said. “It’s too early to say it’s definitely going to be something that will slow the economy and work in favour of us.”
Immediate damaging impact
By contrast, almost the entire business community is united in warning about the immediate damaging impact of the budget’s unexpected extension of such tax increases to all asset classes.
But it’s certainly not just fund manager critics such as Wilson Asset Management’s Geoff Wilson arguing the loss of CGT discounts will mean investors are drawn to dividends from large, low-growth companies rather than high-growth assets.
“If passed, these changes will affect businesses of every size, from companies investing in major projects to small and family-run businesses seeking to grow, create jobs and support their local communities,” a joint statement from a range of business groups cautioned.
Yet the treasurer’s promise of “carve-outs” for some technology start-ups will still be extremely limited as he suggested it was “entirely unsurprising” there had been a range of views presented.
“Tax reform in this country, economic reform is always contested, it’s always contentious,” he said. “It always involves some political cost.
“I’m grateful for the way we have engaged over the past four years with the various peak business organisations, recognising we won’t always have an identical view.”
And business belatedly sounding the alarm now has even less political sway in the Albanese cabinet than the negative reaction of the general public to the federal budget.
Instead, the absurd rush of a two-day inquiry into the CGT changes demonstrates Chalmers’ determination to force them through parliament this month to try to limit the political damage as opposed to the economic damage.
“Our priority is to pass the core elements that are before the Senate right now,” the treasurer said.
Unfortunately, the economy is unlikely to be as compliant as Labor and Greens senators, or businesses as willing to follow bureaucratic forecasts of how investors should behave.
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